NYC is Running Out of Other People’s Money

“There is no practical ways to pay our workforce given the current environment, current tax structure, current other obligations we have more than what we have been doing, with the possible exception of dramatically raising taxes”.

Bloomberg points to public service unions as being among the biggest roadblocks to any meaningful fiscal health in the city.

Currently in NYC, most of the unions are refusing to negotiate contracts right now. This is completely legal. If the contract is not re-negotiated, the current terms continue. The unions are trying to hold out for more money until a new mayor is elected, in the hopes that a new mayor will cave to their demands. One thing Bloomberg wants — which is met with hostility — is to “force union workers to pay part of the health care costs”. Imagine that! “Unless we do something those expenses will bankrupt us,” Bloomberg said.

Living in NYC, I am no fan of Bloomberg’s at all. I do want to give him a little (tiny) credit — he’s been sounding the alarm about this for the past few years. Even back in 2010, Bloomberg told CrainsNY that “city pension funds have set unrealistically high assumed rates of return on investments, at 8%, which may require spending more than has been budgeted for retirement benefits…The pension system itself provides defined benefits that can’t be reduced under guarantees the Legislature has placed in the state constitution. While it permits new, less-expensive benefit tiers for future employees, savings wouldn’t be realized for 10 or 15 years”

The New York pension system is out of control. In addition to the extravagant, irresponsible and under-reported negotiated levels of benefits, there is an additional characteristic of the system that is never talked about. There is a huge break that goes to New York retirees; anyone who gets a retirement pension from New York State, or any locality or agency (teacher, firefighter, etc) pays no city or state income tax on that pension money. This hearkens back to the days when New York workers were so underpaid that this benefit was warranted.

It should be noted that nearly a decade ago, that provision of New York state law was declared federally unconstitutional. It was determined that New York state could not exclude federal retirees from the tax exemption. The courts gave New York two options: make New York government pensions taxable, or add federal workers to the list of non-taxable agencies. Of course, New York chose the latter, thereby adding to the state budget deficits.

Even though historically, public sector employees earned less than what those skills would command in the private sector, that is clearly not the case today. Study after study has shown that public sector compensation – which includes retirement pensions – has steadily outpaced its private sector counterparts in recent years. New York is among the worst offenders.

This state of affairs must be reversed. Allowing the exempted retiree pensions to be taxed the same way other retiree pensions would accomplish two goals: 1) lessen the compensation disparity with private sector employees, and 2) severely reduce the New York budget deficit by providing additional revenue to the state.

But it won’t happen. Too many people are entangled in the system as it is and don’t want to give up their tax-free benefit. And with the unions unwilling to budge on anything with Bloomberg, the likelihood that any real reform will take place — be it pension reform, benefit reform, or anything where the public service union employee might have to pay a little more — is very remote.

How is NYC going to afford all the tsunami it has created? Bloomberg warns that taxes could go up 50% if the unions are given what they want. For high income earners, federal/state/local taxes combined already total 54%! More than half of your income going to the government. This is legal plunder.

Frederic Bastiat characterized “legal plunder” as a “fatal idea” in “The Law”. He wrote, “Imagine that this fatal principle has been introduced: Under the pretense of organization, regulation, protection, or encouragement, the law takes property from one person and gives it to another; the law takes the wealth of all and gives it to a few”

and also this:

“Now, legal plunder can be committed in an infinite number of ways. Thus we have an infinite number of plans for organizing it: tariffs, protection, benefits, subsidies, encouragements, progressive taxation, public schools, guaranteed jobs, guaranteed profits, minimum wages, a right to relief, a right to the tools of labor, free credit, and so on, and so on. All these plans as a whole — with their common aim of legal plunder — constitute socialism”.

Sounds a lot like NYC. It is running out of other people’s money. Of course, Bloomberg never mentions cutting govenment spending and waste as a dent in the abyss, but that’s a whole other matter. The current fiscal trajectory is unsustainable. Higher taxes are unsustainable too. Then what?